Finding hidden gems in fixed income investing

Digging deeper into sub asset classes to find value

11 Mar 2020

Introducing Kevin Zhao, Head of Global Sovereign and Currency, Fixed Income

Kevin Zhao is the lead portfolio manager on all active Global Sovereign and Flexible Fixed Income Strategies as well as Active Currency Management. In this role he is responsible for all investment decisions taken for and implemented in these strategies. He is a member of the Fixed Income Investment Forum, and joined UBS Asset Management in 2011.

The first quarter saw government bond yields struggle as investors sought lower risk assets. In our third mini interview with Kevin Zhao (Head of Global Sovereign and Currency, Fixed Income), we address the question: What are your current views on Government Bonds, considering recent market events?  

Read more of Kevin's insights shortly with the next in this series of mini interviews.

Sub asset classes/markets/currencies

Q: What is your current view on government bonds? Which countries do you favor and why?

A: Given the heightened market fear about the unknown impact of coronavirus spreading to Europe and the US, and the oil price collapse caused by the disagreement between Saudi Arabia and Russia, we believe that government yields in G7 countries will probably trade towards zero or negative in the near term until investors see concerted government and central actions to control the virus spreading and to stimulate weakened economies. At the beginning of the year we thought that the Fed would cut rates in H2 and would see US bonds yields in a range of 1.00–2.25% during 2020.

We continue to focus on cross-country opportunities. We are long fixed income in US, China, Mexico, New Zealand, India, South Africa and Canada vs short in Switzerland, Japan, Germany, UK and Hungary/Poland. We see the long end US bond as a good hedge against non-consensus outcomes such as a US recession or a sudden stock market meltdown. But we don't see much upside from owning bonds in the UK, Germany and Japan as 10 year yields remain very low or negative.

Q: How are you currently positioned in the high yield space?

A: Currently, our strategy owns around 7% HY corporate bonds, below the historical average allocation and these exposures are diversified geographically among the US, Europe and Asia. We have an emphasis on high conviction names favored by our internal credit PMs and analysts. Given the high corporate leverage in the US as a result of record bond issuance to pay for the stock buybacks in recent years, we believe that US high yield bonds will trade at very wide spreads if the stock market and oil prices do not stage any meaningful rebound in the months ahead.

Q: Which currencies do you like the most and why?

A: In developed countries we  have reduced our overweight in Norwegian Krona versus EUR as a result of the price war between Saudi Arabia and Russia although it enjoys attractive valuation, positive carry and superior economic growth. In addition, we like a few relative value positions such as long AUD vs. NZD. For EMFX, we are selectively long those currencies that offer attractive carry in an environment of moderate global growth and low G10 rates In addition, we also hold a few diversified relative value positions within EMFX. 

Q: The carry has always been an important contributor to fixed income strategies. Do you think that it is still the case?

A: It is true that spreads in many cases are currently at historically low levels, implying less than average future returns from carry. However, given moderate global growth, supportive central bank monetary policies and relatively low risk of an imminent global recession, carry still has a role to play in bond portfolios; for example, positive carry on the yield curve or across credit default swaps of similarly rated sovereigns.

Want to know more about flexible fixed income investing?

Read more about how flexible fixed income investing can help you navigate potentially volatile fixed income markets yet take advantage of opportunities as they arise

Coronavirus has become a global issue.

How will it affect the world economy and what does it mean for investors? Our global investment teams explain in an extensive update.

 

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